What Is the Market Thinking?

If ever there was a time when we would expect the collective market sentiment to suddenly decide that stocks are overvalued and cause a bearish plunge in stock prices, it would be now. The Middle East is in turmoil and seems to be on the brink of a wider conflict between Israel and its neighboring countries. The U.S. government is at a standstill as political parties repeatedly fail to elect a leader empowered to direct legislation—and the next government shutdown crisis is only a couple of weeks away.

The collective market sentiment, of course, is an abstract concept representing the thoughts and emotions of all investors who buy, sell, and hold stocks. This sentiment can exhibit peculiar trends at times, as in 2008 when the markets took a 50% nosedive upon news of large brokerage firms misrepresenting the value of their real estate mortgage holdings. The sentiment was rattled by the onset of the Covid pandemic and then decided that things were not just all right but, in fact, worthy of a prolonged stock market boom. We never actually know what the collective market sentiment is thinking from day to day or even week to week, but in the long run, it is generally forced to acknowledge that the values of companies, in aggregate, have been incrementally growing thanks to the efforts of millions of workers who toil at their desks and factories day by day, week by week.

The surprising thing is that, with all the headlines about the current turmoil, the collective market sentiment—that is, the majority of investors—seems to be relatively calm at the moment. True, the markets are down a bit over 2% over the past month, but that hardly qualifies as a panic. Less than a week ago, the indices were above where they had been on October 1.

What gives? The lesson here is that, while some investors might connect dysfunction in Congress and the distressing events coming out of the Middle East with lower stock values, most market participants seem to realize that these things aren’t an immediate threat to company profits. The collective market sentiment is not always irrational or panicky, and there is a danger that this or that individual will panic and sell at a time when the rest of the market doesn’t share their fear. For all we know, when the geopolitical and local political turmoil resolve themselves—and they will, eventually—people will experience relief and optimism, become more confident about the future, and the collective market sentiment will experience positivity and a nice rise in stock prices. Those who panicked will be left behind.

Experience has shown us that whenever people try to outguess the collective market sentiment, they end up with lower returns than what the sentiment, however irrational it may sometimes be, delivers in the long run. The best way to achieve those long-term returns that the collective market sentiment offers is to ride with it for the long haul, experiencing those temporary panics and, as now, those oddly rational periods when you might feel nervous but the markets are holding steady. The collective market sentiment may not always make sense, but its long-term track record has been remarkably positive through much worse headlines than we’re experiencing now.